Treasury's Obligation Rule: Navigating the SLFRF Guidelines under ARPA

Late last year, the Treasury released an Obligation Interim Final Rule (IFR) which provides clarification on questions surrounding the State and Local Fiscal Recovery Funds (SLFRF) under the American Rescue Plan Act (ARPA) program.

Reallocating or re-obligating funds after the 12/31/24 deadline is allowed but in only specific circumstances.

So, what constitutes an obligation? An “obligation” which the Treasury defines as, “an order placed for property and services and entry into contracts, subawards, and similar transactions that require payment”. Simply put, if payment must legally be made for some good or service, an obligation has been established. A governing body voting to allocate, dedicate, or earmark a purchase or expenditure is not necessarily an obligation – a legal order or contract must be established for an obligation to be made. However, the Treasury is now allowing some exceptions to this obligation rule and deadline of 12/31/24.

What are the exceptions and how can you take advantage of them?

Recipients may obligate and spend SLFRF money after 12/31/24 on the following eligible legal and administrative related costs:

reporting and compliance requirements
single audit costs
record retention and internal control requirements
property standards
environmental compliance requirements
civil rights and nondiscrimination requirements

Eligible costs in these categories would be for in-house staff time or consultant/contractor expenses to satisfy these Federal grants requirements.

Recipients of SLFRF funds can take advantage of this exception and utilize these funds for administrative costs by following a four-step process:

Estimating the amount needed,
justifying the estimate,
reporting the estimate to the Treasury by specific deadlines (January 31, 2025, for quarterly reporters, and April 30, 2025, for annual reporters),
and detailing the final amount spent at award closeout.

It's not mandatory to estimate all administrative costs, only those intended to be covered by SLFRF funds. The Treasury will issue further instructions on how to report these estimates in the Project and Expenditure Report due by January 31, 2025 (for quarterly reporters) and April 30, 2025 (for annual reporters) and how the final amount expended should be reported in subsequent reports.

New SLFRF guidance

The U.S. Treasury has issued new guidance in the updated SLFRF Final Rule FAQ which aims to clarify obligation of SLFRF funds; below are some important considerations:

Firstly, an interagency agreement is considered an obligation if it imposes conditions on fund usage, governs fund provision for eligible uses, or oversees procurement of goods or services between government entities, provided it also specifies scope of work and project deliverables, is signed by involved parties, and creates binding obligations.
Secondly, personnel costs are considered obligations if the position was established and filled before December 31, 2024, and the obligation extends through December 31, 2026.
Lastly, recipients can use SLFRF funds to cover cost increases in contracts or subawards made by December 31, 2024, for change orders or contingencies specified in the original contract, or for contract amendments within the same scope.
a. If a contract specifies change orders or contingencies, SLFRF funds can be used to cover these increased costs. These are not new obligations but are linked to existing contracts to address changes or contingencies.
b. Contract amendments are allowable as long as they remain within the same scope and purpose as the original contract. This aligns with the ability to terminate contracts for convenience and use SLFRF funds for costs related to contractually anticipated change orders and contingencies.
c. Recipients can estimate funds needed for changes or contingencies until the end of the expenditure period. This estimated amount can be reported as the final obligation to the Treasury by the end of 2024 and retained to cover these costs. Provided these funds are used for eligible purposes, recipients won't need to return them after 2024.

Special situations allowing for post-deadline re-obligation

In addition to the above exceptions to the obligation deadline of 12/31/24, there are also situations outlined in the Obligation IFR where a recipient could re-obligate funds after the deadline. These conditions apply if the recipient had an existing contract or subaward before the deadline and needs to make changes post-deadline without having fully spent the originally obligated funds. The situations include:

Termination of the contract or subaward due to the contractor's or subawardee's default, business closure, or inability to perform.
Mutual agreement between the recipient and contractor or subrecipient to terminate the contract or subaward for convenience. Additionally, it is noted that per the Uniform Guidance, all contracts over $10,000 must include terms addressing termination for cause and convenience, detailing the process and basis for settlement.
Termination for convenience by the recipient if the contract or subaward was improperly awarded, with documented evidence and determination of impropriety, provided the original agreement was made in good faith. Contracts made in good faith are defined as those where standard procedures were followed.

If a recipient needs to enter a replacement contract after the December 31, 2024, obligation deadline, they must still meet the expenditure deadline. Until the Treasury provides guidance on documenting and reporting re-obligation for the above three reasons, we recommend recipients maintain documentation to justify determinations to satisfy future Treasury reporting requirements.

Resources

Treasury will host recipient webinars on May 8 and 9, 2024 to further explain these and other clarifications. Recipients are strongly encouraged to attend one of these two webinars; the same material will be presented on each date. Recipients may use the links below to register for a webinar:

Date: May 8, 2024

Time: 10:00am-11:30am ET / 9:00am-10:30am CT / 8:00am-9:30am MT / 7:00am-8:30am PT

Register now

Date: May 9, 2024

Time: 1:00pm-2:30pm ET / 12:00pm-1:30pm CT / 11:00am-12:30pm MT / 10:00am-11:30am PT

Register now

Note

The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Baker Tilly Municipal Advisors, LLC is a registered municipal advisor and controlled subsidiary of Baker Tilly US, LLP, an accounting firm. Baker Tilly US, LLP, trading as Baker Tilly, is a member of the global network of Baker Tilly International Ltd., the members of which are separate and independent legal entities. © 2024 Baker Tilly US, LLP